The idea of calling Ravi Menon was amongst all the things in the note that he's written in the 'What Now' section. Ravi mentions that they expect enterprise technology architecture changes, the drive for that would mean that we are in a multi-year super cycle of spending, the first since the 2000s when we saw the adoption of web technologies. Ravi, great having you as always, of course, thanks for joining in. Good morning. You know, usually we start with the beginning of the report, I'm starting with what you wrote at the end of the note because it really caught my eye. What do you mean when you say this?
I believe that this is a long-cycle industry, right? And so the cycles are like, it might take 20, 30 years, and we might have like a 10-year upcycle and then like a 10 or 15-year kind of moderation. And that happens because for large changes in technology, I mean like right now for example, all this excitement about AI, we would not have been able to have that excitement if it hadn't been for solid-state storage prices dropping over the last decade or network latency dropping over the last 10-15 years. So if it weren't for all that, we wouldn't be able to use the cloud, we wouldn't be able to have real-time data processing capability. All this has emerged so that now when the computing power for AI has emerged, it can actually, it's at the right place, everything is coming together. So that's why we are really excited about this. I haven't seen, I think, something like this since the web browser really opened up, I'd say, the interaction for data outside enterprise firewalls.
Okay, so Ravi, by the way, this is Mira, Punit was my colleague who just spoke earlier about your note. But yeah, just trying to understand. So what are the implications of something like this? I mean, it sounds great to hear about a multi-year super cycle. How do, for example, Indian IT services companies participate in it? Or would it largely be product companies? Or would IT services also have a part to play? And when it's a multi-year thing, is it a large portion of the revenue share of some of the Indian IT firms, be it ER&D, product, or services?
It will be a, you know, this will be a large and growing part of it. I would think that, you know, think of this as an extension of the digital transformation wave that we started seeing in 2019. Right, so this is, see, I'm not saying that we will have, the industry is so large that the large-cap companies are so big, we are not talking about, you know, 20% growth for a TCS, right? I mean, that's not what we're saying. But we think the overall industry can actually be in like a 10 to 12% sort of growth range, you know, that's the possibility for 3 to 5 years or even more. And I think that itself, and with the midcaps of course growing much faster than that, and select large caps within that, like a smaller one like an HCL probably delivering 12-15% growth, quite possible, that's what we think. And it's a, and software services firms, I think that, you know, rather than product firms, this is I think going to be a lot more services-driven because AI, I think, is what each enterprise wants to do with AI, it's going to be unique to that particular company and what will be the priorities will also be unique. So I don't think that we will see really product companies do as well as services companies here. I think it'll be a lot of custom builds, you know, in AI.
In some sense, then that's a bit of a about-face, right? Because for the last maybe 10 years, and correct me if I'm wrong, but product companies have actually outpaced service companies' growth. You reckon that the ushering of AI plus this enterprise hardware etc. change could all mean that IT services have the field set for them? Who captures how much is anybody's guess, but the stage is set for IT services companies which can capture the growth wave to actually do better.
Absolutely, there is. I mean, that's what we think, you know, that SaaS was actually expected to make everything redundant, right? I mean, there were people thinking that first SaaS and then the whole idea of low-code, no-code, like ServiceNow, people were actually thinking that will mean the death of services companies. You know, with low-code, no-code, like ServiceNow, people said that, you know, this will all be done by business users, there is no need for developers anymore. Even with AI, we actually have kept hearing that, right? That we won't need developers anymore. I actually think it's the exact opposite. You know, we will see a lot more use, yes, there will be productivity benefits, but I actually think that a lot of AI use will also be opening up a new market that, you know, we've been hearing of for the last 30 years but was always, you know, I think people didn't want to sign off on it. That is the legacy modernization bit. Now, why would you want to replace a perfectly well-running system, you know, at great cost and great risk? You know, so no one wanted to do that. Now I think with AI, the risk is lower, the cost is lowered, and legacy transition is another very good opportunity. And I think that that part of it is really something that I would say, you know, works better for the larger firms. They already are incumbents there, they have the knowledge about the customer system too. So I would think, yeah, someone like a TCS, I think, should be in a good position for that. TCS is our top pick among the large caps because of that as well as margin expansion possibilities. HCL is our number two pick, you know, we take a medium-term view. We actually prefer TCS more from a short-term perspective. Among the midcaps, we also like Persistent Systems, you know, because we see them as a very good challenger vendor in, you know, this system. And then we also see their AI investment, you know, where they help software product companies develop products, that actually they've extended. They're also looking at helping enterprises with adoption and to roll out releases faster using their trademark AI platform, I would call it SAS.
